by Zen Webnet | Mar 27, 2024 | Blog
Article by Vijay K Singh & Himanshu Dubey
“Sometimes, in quest of justice we end up doing injustice” – Hon’ble Mr. Justice Pankaj Mithal
A. BACKGROUND
Three judge Bench of the Hon’ble Supreme Court in Asian Resurfacing of Road Agency (P) Ltd v CBI[1] vide order dated 28.03.2018, inter alia issued the directions in para 35 & 36 of the judgment that in all matters, civil or criminal, orders of stay which have once been granted should not continue beyond a period of six months unless specifically extended and the stay shall stand vacated automatically. Pertinently, the said direction was issued with the view to remedy the proceedings remaining pending for long time on account of stay causing unnecessary delay in completion of trial.
In Miscellaneous Application No. 890 of 2021[2], another three-judge Bench of the Hon’ble Supreme Court vide order dated 02.07.2021 again directed to follow the direction issued Asian Resurfacing case (supra)..
Interestingly, the matter concerning the adverse effects experienced by the litigants upon the automatic vacation of the stay order was brought before the Hon’ble Allahabad High Court in the matter of Chandrapal Singh vs. State of U.P. and Another,[3] wherein the Hon’ble Allahabad High Court vide judgment dated 03.11.2023, framed substantial question of law for consideration by the Hon’ble Supreme Court under Article 132 of the Constitution of India and granted a Certificate for Appeal to the Supreme Court to the applicants therein.
Hon’ble Supreme Court in Criminal Appeal No(s).3589/2023 titled as High Court Bar Association Allahabad Vs The State Of Uttar Pradesh & Ors., vide its order dated 01.12.2023, referred the matter to the Constitution Bench of five Judges to examine the correctness of the directions issued in para 36 and 37 of by the Coordinate Bench in Asian Resurfacing case (supra). The Hon’ble Supreme Court while referring the matter to the Constitution Bench duly noted that the delay may also be occasioned due to the inability of the Courts to take up proceedings expeditiously and automatic vacation of stay without application of judicial mind will result into serious miscarriage of justice.
Eventually, the Constitution Bench of the Hon’ble Supreme Court of India vide its judgment dated 29.02.2024 overruled the directions issued in the case of “Asian Resurfacing case (supra) i which provides for automatic vacation of stay orders granted by High Courts unless extended by a speaking order and day-to-day hearing of cases in which stay has been granted.
B. CRITICAL ISSUES:
- Limitation to exercise power under Article 142 – Article 142 of the Constitution of India which confers jurisdiction on the Apex Court to pass such a decree or order necessary for doing complete justice in any case or matter pending before it however there are some limitations to the same:
i. It cannot be exercised to nullify the benefits derived by a large number of litigants based on judicial orders validly passed in their favour who are not parties to the proceedings before this Court.
ii. It does not empower the Court to ignore the substantive rights of the litigants.
iii. It cannot affect the substantive rights of those litigants who are not parties to the case before it. The right to be heard before an adverse order is passed is not a matter of procedure but a substantive right.
iv. The power under Article 142 cannot be exercised to defeat the principles of natural justice, which are an integral part of our jurisprudence.
v. Only the legislative body holds the authority to designate certain categories of cases to be adjudicated within specified timeframes.
- Object of Passing the Interim orders:i.Object of passing interim orders is to allow courts to aid the final relief sought in a case only where three factors i.e. prima facie case, irreparable loss, and balance of convenience are made out.
ii. Remedy before the High Court would become ineffective if the pending trial is not stayed and the Trial Court decides the pending case.
iii. Courts, while passing orders of stay in serious cases like the offences under the PC Act or serious offences against women and children, must be more cautious and circumspect.
iv. Our legal system, which is facing a docket explosion of pending cases, the grant of stay of proceedings is called for in many cases.
- The Hon’ble Apex Court observed that the Hon’ble High Courts can vacate interim orders on various valid grounds such as deliberate prolongation of litigation by a litigant, interim order has been granted on suppression or misrepresentation of material facts, etc.
- It is essential that significant legal matters are not adjudicated upon without a genuine dispute between the parties as such Courts should refrain from passing the judgments on the issues without the lis before it.
- Interim order of stay can come to an end by way of disposal of the main case or judicial order vacating interim relief, passed after hearing the contesting parties on the available grounds.
- A High Court, as per the constitution, maintains independence from the Hon’ble Supreme Court of India and does not operate under its authority. The authority vested in the High Court under Article 227 of the Constitution includes power to stay the proceedings before its subordinate courts.
CONCLUSION –
The Hon’ble Supreme Court overturned the directives issued in the Asian Resurfacing Case (supra) inter alia directing that there should not be an automatic vacation of stay granted by the High Court. Additionally, the Supreme Court expressed disapproval of the mandate to adjudicate cases on a daily basis when interim stay had been granted by the High Court. Such broad directives cannot be issued under the jurisdiction granted by Article 142 of the Constitution of India. Justice hurried is Justice buried. Judgment dated 28.03.2018 Asian Resurfacing is a clear example of the same.
Pertinently, earlier also. the Hon’ble Supreme Court in Deputy Commissioner of Income Tax & Anr. v. Pepsi Foods Limited[4] struck down the provision of automatic vacation of stay on the ground that such provision is manifestly arbitrary.
The directions issued in Asian Resurfacing (Supra) undermined a litigant’s entitlement to remedies under Articles 226 and 227 of the Constitution of India, essentially nullifying a litigant’s right to pursue and utilize statutory remedies under Code of Criminal Procedure, 1973 and the Code of Civil Procedure, 1908 respectively. It is highly unreasonable and prejudicial to invalidate all interim stay orders issued by High Courts solely due to the passage of time. Not all litigants have the financial means to initiate proceedings in the Constitutional Courts. Those who can afford to approach these Courts should not be permitted to gain unfair advantage by obtaining orders for expedited disposal of their cases, while other litigants wait patiently in line for their turn to be heard. The reality of the backlog of cases in our courts is daunting; simultaneously, it is impractical to expect that the High Courts would prioritize or expedite exclusively those cases where proceedings have been stayed, while overlooking numerous other categories of cases that may warrant greater urgency.
The issue of delays in the Indian judiciary refers to the prolonged duration it often takes for cases to be resolved or for legal processes to be completed within the judicial system of India. As such the Hon’ble Supreme Court while noting “Ideally, the cases in which the stay of proceedings of the civil/criminal trials is granted should be disposed of expeditiously by the High Courts. However, we do not live in an ideal world” has also issued guidelines to prevent prejudice to the opposing parties when granting ex-parte ad-interim relief without hearing the affected parties that ad interim relief shall be passed for a restricted duration. Subsequently, upon hearing the contesting parties, the Court may decide whether to confirm the initial ad-interim order or not. The vacating or affirming of ad-interim relief, once granted, should only occur after careful consideration by the Court. Applications for vacating interim reliefs shall not be kept pending for long time and recourse to the easy option of directing that the same should be heard along with the main case should be avoided.
[1] (2018) 16 SCC 299.
[2] Asian Resurfacing of Road Agency Pvt. Ltd. & Anr. v. Central Bureau of Investigation, Miscellaneous Application No. 890 OF 2021
[3] Application No. – 28574 of 2019.
[4] (2021) 7 SCC 413.
by Zen Webnet | Mar 26, 2024 | Blog
Article by Kabir Chaturvedi & Kopal Chaturvedi
Confidentiality in arbitration serves as both a shield to protect sensitive information and a sword to promote candour among disputing parties. Further, as the Federal Court of Australia recently noted, “confidential arbitration can be attractive to parties wishing not to have their dirty laundry aired in public, or wishing to maintain an ongoing commercial relationship with each other by excluding interference or pressure that might come from their dispute being aired publicly”. Thus, for India to become ‘the next hub for international arbitrations’, it is imperative to have a robust mechanism to protect and enforce confidentiality. However, despite the recent amendment in the Arbitration and Conciliation Act of 1996 (‘Arbitration Act’) to protect the confidentiality obligation, the gaping holes in the new provisions do little to address the issues around ensuring enforcement of confidentiality in the country. This article identifies the shortcomings of the existing statutory regime regarding confidentiality and provides possible remedies to address them.
The Pitfalls in the Existing Regime
After the recommendation of the B.N. Srikrishna Committee to include a new provision in Part I of the Arbitration Act designed to safeguard the sanctity of confidentiality in arbitral proceedings, Section 42-A of the Arbitration Act was introduced through the 2019 Amendment. This section stipulates that arbitrators, arbitral institutions, and parties to the arbitration agreement must maintain confidentiality throughout arbitral proceedings, except for the disclosure of the award when necessary for its implementation and enforcement. However, this provision falls short of fully implementing a mechanism to protect confidentiality for the reasons elucidated below:
Firstly, Section 42-A only imposes the obligation to maintain confidentiality in arbitral proceedings upon “the arbitrator, the arbitral institution and the parties to the arbitration agreement”. However, parties often refer disputes to arbitration due to their complex nature. This requires involvement of non-signatories like expert witnesses for comprehensive adjudication of disputes. While such parties may not be actively involved in arbitrations, they are nonetheless part of the proceedings. Further, as per the Supreme Court’s recent landmark decision in Cox and Kings, parent companies which are non-signatories to arbitration agreement can also be made parties to arbitration proceedings by applying the Group of Companies (‘GOC’) doctrine if their consent to be bound by the agreement is implicit through their conduct. Therefore, while the involvement of non-signatories is now practically a certainty in arbitration proceedings, Section 42-A does not extend the obligation of confidentiality to such parties to the proceeding.
Secondly, Section 42-A only exempts the parties from the obligation of confidentiality in cases where “disclosure is necessary for the purpose of implementation and enforcement of award”. However, parties often seek judicial intervention for interim relief under Section 9 of the Arbitration Act when the relief which could be granted by the arbitral tribunal under Section 17 of the Arbitration Act is deemed to be inefficacious. The provision does not address such situations or provide exception for the same.
Further, while confidentiality is essential for fostering candid discussions and protecting sensitive commercial information, there are instances where the public interest demands transparency. Therefore, confidentiality in arbitral proceedings cannot be absolute, and exceptions need to be codified to discard the obligation in cases where there arises a conflict between transparency and confidentiality. The exception of transparency to maintaining confidentiality has also been duly recognized by Foreign Courts in a catena of decisions[1].
Thirdly, the absence of a mechanism to enforce confidentiality obligations and the recourse available to the arbitral tribunal in cases of non-conformity with this provision is perhaps what renders this provision toothless. In theory, it could be argued that an award passed in a proceeding where the obligation to maintain confidentiality has been breached would be against the public policy of India due to a violation of Section 42-A, and hence the award would be liable to set aside. However, this would not only undermine the efficiency of arbitral proceedings but also give the party breaching the obligation of confidentiality to escape unscathed.
Lastly, while the Arbitration Act 1996 recognizes the importance of confidentiality in arbitration, it lacks detailed provisions on privacy. The absence of explicit statutory guidelines leaves room for interpretation, leading to uncertainty and potential disputes over the scope of confidential information.
Suggested Remedies
Binding Non-Signatories
With regards to the extension of the confidentiality obligations to non-signatories, the authors believe that the Supreme Court’s decision in Cox and Kings has provided a firm foundation for the legislature to amend Section 42-A and extend the confidentiality obligation to non-signatories. The Court in Sunkist, Thixomat v. Takata Physics International Co.[2] was faced with a similar problem, where the non-signatory subsidiary alleged that the confidentiality provision of the contract had been breached and requested for arbitration of disputes. The court ruled that because of the close relationship between the subsidiary and the parent company, the fact that both entities sought an identical remedy and because the claims arose “from one common nucleus of operative facts,” they were “intimately founded in and intertwined with the underlying contract obligations” and had to be referred to arbitration. Therefore, courts can use the GOC doctrine to enforce confidentiality obligations upon a non-signatory which is part of the same corporate group as a signatory and/or is closely connected to the dispute.
Necessary Exceptions
From the issues outlined above, it is evident that Section 42-A of the Arbitration Act does not account for the many situations where confidentiality obligations may need to be discarded. Hence, the authors propose the following exceptions:
Firstly, to address situations where parties seek judicial relief at an interim stage, the authors believe that the exceptions of disclosure necessary for protecting or pursuing a legal right or interest of the party can be borrowed from Section 18 of the Arbitration Act of Hong Kong to avoid any unnecessary litigation arising out of a conflict between Section 9 applications under the Arbitration Act and confidentiality obligations.
Secondly, where parties still want to maintain confidentiality while seeking interim relief, Section 22 and Section 23 of the Singapore International Arbitration Act (“SIAA”) provides an appropriate solution. Section 22 of SIAA provides that the proceedings under the act before the courts shall be heard otherwise than in open courts, on the application of any party to the proceedings. Further, Section 23 of SIAA gives the courts power to issue necessary directions regarding what information relating to the proceedings may be published, provided the parties mandatorily consent to such publication.
Thirdly, to further make the provision more robust with regard to exceptions to the confidentiality obligations, the authors also suggest that the exception of the ‘disclosure being made with the consent of the parties, to the parties’ advisor, for the protection of the legitimate interest of the third party, and by order of the court’ be borrowed from Section 14B of the New Zealand Arbitration Act of 1996 to ensure party autonomy is protected and there is no conflict between the two cornerstones of arbitration.
Lastly, the exception of necessary disclosure in the interest of public or justice is necessary to align the statute and the jurisprudence on the issue.
Consequences of Breach
For the provision of confidentiality to be effective, it is necessary that it provides for consequences in case a party is found to be in breach of obligation. The consequences must depend on the degree of the breach and may range from grant of damages to invalidating the respective order/proceedings during which such breach takes place.
Conclusion
In conclusion, addressing the shortcomings in India’s confidentiality provisions demands immediate attention. Drawing insights from foreign jurisdictions, urgent amendments are imperative. It is crucial to emphasize that the proposed remedies do not advocate a sweeping extension of confidentiality across all arbitral documents. Instead, they advocate a tailored approach—confidentiality granted solely to documents mutually agreed upon by the involved parties. Striking a balance between transparency and protection, this nuanced adjustment is pivotal for fostering a robust legal framework that aligns with global standards, ensuring the efficacy and fairness of arbitral proceedings in the Indian context.
[1] AAY v. AZV [2012] SGHC 116; The Chartered Institute of Arbitrators v. B [2019] EWHC 460 (Comm); Esso Australia Resources Ltd. v. Plowman (1995) 183 CLR 10.
[2] No. 01 Civ. 5449(RO), 2001 WL 863566 (S.D.N.Y. July 30, 2001).
by Zen Webnet | Mar 18, 2024 | Blog
Article by Pranav Nayar and Nikhat Jamal
Introduction
The Arbitration and Conciliation Act, 1996 provides parties with limited solutions for an appeal from an arbitral tribunal’s interim orders. In the absence of an established standard and procedure of review, the question arises whether an arbitral tribunal has the jurisdiction to review its own orders. In this article, we discuss the issues that arise owing to the lacunae in the statute and the consequential judicial interpretations. We further analyze the power of the arbitral tribunal to recall its orders and how the judiciary has addressed the same through various judgements.
The Power to Review
The Supreme Court in the landmark case of Kapra Mazdoor Ekta Union v. Management of Birla Cotton Spinning and Weaving Mills Ltd. carved out the difference between a review on merits and a procedural review.[1] In a procedural review, the Court or quasi-judicial authority having jurisdiction proceeds to do so and commits procedural illegality which goes to the root of the dispute. In turn, the authority invalidates the proceeding and the subsequent order passed thereof.[2] For example, cases where a decision is rendered by the Court or a quasi-judicial authority without notice to the opposite party or under a mistaken impression that notice had been served upon the opposite party were held to be falling in the category where the power of procedural review may be invoked. Such a review aims at setting aside a palpably erroneous order passed by the authority under a misapprehension. On the contrary, if a Court or a quasi-judicial authority having jurisdiction to adjudicate on merit proceeds to do so, its order can be reviewed on merit only if such an authority is vested with such power by express provision or by necessary implication. The Supreme Court has held that an arbitral tribunal has no inherent power to review on merit.[3]
The Power to Recall
The power to recall is different from the power of review. The power to review as elucidated above refers to a situation where there was an error apparent in the order of the Tribunal. The power to recall on the other hand relates to the order being reverted to the authority where the party was deprived of making its submission due to a sufficient cause. While the courts have the power to recall their own orders[4], the same is not available to arbitral tribunals. The High Courts have provided contrasting positions while dealing with the issue. While the Patna High Court reasoned that a recall power cannot be interpreted from the provisions of the Act either specifically or by necessary implication. However, the Delhi High Court in the matter of Awasthi Construction Co v. Govt of NCT of Delhi and Anr,[5] differed from the abovementioned judgements and held that the arbitrator does not become functus officio after passing an order under Section 25(a) of the Act and can recall the order after sufficient cause is shown.
Addressing the dichotomy
The aforesaid issues were addressed and settled by the Supreme Court in the case of Srei Infrastructure Finance Ltd v. Tuff Drilling Private Ltd[6]. The Hon’ble Court also upheld the view that every tribunal has inherent powers to review its order on the grounds of a procedural defect. It was held that arbitral tribunal, being a quasi- judicial authority, is vested with the power to invoke procedural review. The Apex Court also affirmed that there is no distinction between a statutory tribunal established under statutory provisions or the constitution when it comes to the authority for procedural review. Additionally, the court pointed out that Section 19 of the Act, which specifies that the arbitral tribunal is not bound by the procedural rules outlined in the Code of Civil Procedure, 1908 (“CPC”), should not be interpreted to mean that the arbitral tribunal is restricted from drawing guidance from any provisions within the CPC. Consequently, the underlying principles of Order IX Rule 9 can be utilized by an arbitrator. Furthermore, by drawing a clear distinction between terminations under Section 25(a) and Section 32, the Court emphasized that the option for recall is only applicable under the former. This distinction arises because Section 25(a) deals with terminations resulting from the ‘default of the claimant,’ while Section 32 pertains to situations where it is ‘impossible’ to continue with the arbitral proceedings.
Analysis
Arbitration proceedings are typically guided by the procedure agreed upon between the parties that are involved in the dispute and the provisions of the Act become applicable in cases where the procedure is not agreed upon. While the Act under Section 29 stipulates that the tribunal shall not be bound by the rules of CPC, the provisions of the Act do not prohibit the Arbitral Tribunal from drawing sustenance from the fundamental principles underlying the CPC or Evidence Act, but free the Tribunal from being bound, as would a Civil Court, by the requirement of observing the provisions of the CPC and the law relating to evidence with all its rigor.[7] Therefore, in the current scenario, the use of the CPC by the arbitral tribunal aligns with established court precedents in India. Additionally, applying the CPC to address procedural formalities not explicitly outlined in the Act ensures that the parties have suitable recourse.
Conclusion
The legal position regarding review was further clarified by the Delhi High Court in the case of Delhi Development Authority v. Naveen Kumar[8], which reaffirmed the Supreme Court judgement that the tribunal has no power to review on merit and is not available unless expressly conferred by law[9]. Moreover, the Delhi High Court last year categorically held that though the arbitral tribunal does not have the power of substantive review of its previous order, it does have the power to vacate or modify the conditions of its previous order if the change in circumstances so warrant or causes undue hardships to the party seeking such modification.[10]
While the Act provides for correction and interpretation of an arbitral award[11], the same is not expressly available for an order passed by the tribunal. Thus, the need for a proper legal framework is essential to avoid any arbitrariness in the process, further complicating the resolution process between the parties and requiring the involvement of the courts.
[1] Kapra Mazdoor Ekta Union v. Management of Birla Cotton Spinning and Weaving Mills Ltd, C.A No. 3475 of 2003.
[2] ATV Projects v. Indian Oil Corporation Ltd, 200 (2013) DLT 553.
[3] State of Arunachal Pradesh v. Damani Construction, (2007) 10 SCC 742.
[4] Order IX Rule 13, Code of Civil Procedure, 1908.
[5] Awasthi Construction Co v. Govt of NCT of Delhi, 2013 (1) ARBLR 70 (Delhi).
[6] Srei Infrastructure Finance Ltd v. Tuff Drilling Private Ltd, (2018) 11 SCC 470.
[7] Maharashtra State Electricity Board v. Datar Switchgear Ltd, (2010) 10 SCC 479.
[8] Delhi Development Authority v. Naveen Kumar, 2017/DHC/4058.
[9] Supra Note 3.
[10] Airports Authority of India v. TDI International Limited, ARB. A. (COMM.) 17/2022 & I.As. 6774-75/2022.
[11] Section 33, Arbitration and Conciliation Act, 1996.
by Zen Webnet | Mar 14, 2024 | Blog
Article by Ankita Sinha
The question of law and concept of ‘Group-Company Doctrine’ which was referred to the constitution bench of Hon’ble Supreme Court in the matter of Cox & Kings Ltd. v. SAP India (P) Ltd.[1], has now been crystallized and made enforceable under the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’). The Hon’ble Supreme Court has recognized the Doctrine’s application to bind non-signatories to an ‘Arbitration Agreement’ upon satisfaction of certain parameters. The controversy over binding nature of Arbitration Agreement on non-signatories – in absence of their express consent inter-alia the concepts of ‘Autonomy’ and ‘Privity of Contracts’ has been laid to rest to the extent that Court’s seized of the question have to determine if there exists a defined legal relationship between the non-signatory and the parties to the arbitration agreement. Depending on the facts and circumstances of each case, the courts where the question of applicability of doctrine arises will have to see whether the non-signatory has consented to be bound by the arbitration agreement, either expressly or impliedly.
Analysis of “Group of Company Doctrines”
In recognizing the Group Company Doctrine as an applicable concept under the Indian Arbitration regime – and making the joinder of parties who are non-signatory to the Arbitration Agreement – a question of contractual interpretation, the Hon’ble Courts have given way to a more diverse and expansive view of what constitutes an ‘Arbitrable Dispute’. By way of the present Article, the author is trying to analyze the broader impact of the Constitution Bench judgment on the Indian Arbitration regime, with a focus on the meaning of ‘Arbitrable Disputes’ in the subsequent judgments of Indian Court.
However, before delving into what the Hon’ble Courts have held subsequent to the judgment of the Constitution Bench, the present Article is briefly dealing with the findings on the ‘Group Company Doctrine’ as the same forms the backbone of the subsequent rulings on ‘Arbitrable Dispute’. Vide the judgment upholding the ‘Group Company Doctrine’ the Hon’ble Supreme Court has cautioned that a pragmatic approach ought to be adopted to ascertain consent of the non-signatory from the facts of each case. The Hon’ble Court examined the questions of ‘Single Economic Reality’ ‘Implied Consent to arbitrate’ ‘Piercing of Corporate Veil’ etc. to find that the conduct of the non-signatory is the most important factor to be considered by the courts and tribunals as the same is an indicator of the intention of the non-signatory to be bound by the Arbitration Agreement. In its conclusions, it was held that the definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties and that principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies’ doctrine. Indeed, it has been clarified that group of companies’ doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act. It has also been cautioned that the at the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement.
Following the Judgment of Cox & Kings, recently the Hon’ble Delhi HC in the matter of Opuskart Enterprises v. Kaushal Kishore Tyagi[2] dated 10.01.2014 in an application under S.11(6) of the Arbitration Act examined the Arbitration Agreement arising out of a partnership deed between certain individuals. In the said case, the partnership deed clearly narrated that the referred parties intended to carry on the business of trading, import and export of books and any other businesses which the partners intended to deal with under the name of M/s Opuskart Enterprises. Under Clause 12 of the Deed, the parties were required be just and faithful and render true accounts and full information relating to the firm to the other partners and also pay their separate private debts on their own.
It was the case of the Petitioners is that the Respondent – Mr. Tyagi had indulged in misappropriation of funds of the firm. Accordingly, notice was issued initially raising a claim of certain amounts. In the reply to said notice, Respondent stated that apart from being a partner in the partnership firm, the said partners are also Directors in M/s Opuskart India Pvt. Ltd and made allegations that the that the Petitioners intended to hijack, usurp and run away with the business of both the firm as also the company. Whereafter, the Petitioners invoked the Arbitration Clause and since there was no response from the Respondent, the S.11 petition was filed before the Hon’ble High Court of Delhi. The Hon’ble High Court was therefore seized of the question as to whether the disputes raised by the Petitioner, since the business was common between the firm and the company, whether the claim is an arbitrable dispute.
Without going into the factual analysis of the above case, attention is drawn to the Hon’ble High Court’s interpretation of the Cox & Kings judgment (Supra). Rejecting the Respondent’s arguments that the accounts relating to the firm, or the Company would not be ‘Arbitrable Disputes, the Hon’ble Judge took the view that since the business by the Partners is being conducted both through the firm and by the company, the disputes raised would in fact be arbitrable disputes. Therefore, in the Opuskart Judgment (supra) the Hon’ble Judge reiterated the view taken in Cox & Kings and stated that a non-signatory affiliate or sister or parent company can be a party to an arbitration agreement if there is mutual intention of the signatories and non-signatories to this effect.
However, in the subsequent judgment of the Hon’ble Delhi High Court in the matter of Vingro Developers (P) Ltd. v. Nitya Shree Developers (P) Ltd[3] dated 24.01.20214, where once again the main challenge raised by the respondent was that Respondent No. 2 and 3 were not parties to the Arbitration Agreements and thus, the matter could not be referred to arbitration against them, as the Respondent No.2 and 3 had only acted in their capacity as directors of the Respondent No.1. It was argued that they cannot be held personally liable, and the referred disputes were not ‘Arbitrable Disputes’.
The Hon’ble Delhi High Court, interpreted the judgment in Cox & Kings and found that to bind a non-signatory to an arbitration agreement, there must exist a common intention between the parties to do so, and held that there was a principal agent relationship between the Respondent No.1 and Respondents Nos. 2 and 3, and merely because they were signatories to the Builder Buyer Agreement in question, Arbitration could not be invoked against them.
Conclusion
By way of the illustration of the above referred two judgments of the Hon’ble Delhi High Court, in the aftermath of the Constitution Bench Judgment in Cox & Kings, the author is trying to convey that the diverse views being taken by the Hon’ble Court’s is a curiouser subject and begs the present analysis insofar as the contrary views & interpretations only make it fascinating to see how the definition of ‘Arbitrable Disputes’ especially in cases of Partnership Firms and Companies will unfold going forward. The present Article is a mere commentary on the diverse understanding of the evolving Group Company Doctrine, and as stated above, it will be fascinating to follow and analyze. However, it goes without saying, that the Constitution Bench Judgment and recognition of the ‘Group Companies doctrine” has left the Indian Arbitration Jurisprudence much richer.
[1] 2023 SCC OnLine SC 1634
[2] 2024 SCC OnLine Del 266
[3] 2024 SCC OnLine Del 486
by Zen Webnet | Dec 30, 2023 | Blog
Article by Ankita Sinha and Neelambika Singh
As a general rule, a party claiming damages for loss of profit is required to establish breach. As long as the breach is established by the Contactor, no further evidence as to proof of actual loss is required. The Hon’ble Supreme Court has in the cases of A.T. Brij Paul Singh v. State of Gujarat, (1984) 4 SCC 59 and Dwaraka Das v. State of M.P., (1999) 3 SCC 500, laid down the law w.r.t to Loss of Profit, wherein it considered granting damages for loss of profit justified and has held that reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract.
The claim for Loss of Profit has been duly upheld in subsequent cases by the Hon’ble High Court, and the High Courts have refused to interfere with the Loss of Profit awarded by Arbitral Tribunal’s in cases of National Highways Authority of India v. BEL-ACC(JV), 2012 SCC OnLine Del 5350 and National Highways Authority of India v. Afcons-Apil Joint Venture, 2018 SCC OnLine Del 7194, thus fortifying the foundation for claim by private parties who were obstructed from executing work contracts in time, for delays not attributable to them.
However, in its recent judgment in Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd., 2023 SCC OnLine SC 1208, the Hon’ble Supreme Court has laid down a more stringent criteria for determination of quantum of damages for loss of profit. It is therefore important to examine the legal development on this aspect and the same is being analysed in the present article.
Background of the Dispute:
BEEL[1] was awarded the turnkey contract for detailed engineering including civil and structural design, supply and erection, testing and commissioning of 23 MLD capacity Sewage Water Reclamation Plant in Mahul Refinery area by HPCL[2], for a contract value of Rs.574.35 lakhs. The initial period of the contract period was 18 months, upto August 1993, however, there was delay in completion and the contract was extended by HPCL on various occasions on the request of BEEL, after which BEEL abandoned the work in March 1996, after completing 80% of the work.
On 04.07.1996, BEEL made a formal claim to HPCL for breach of contract on account of delay in execution, causing extra expenses and losses. Subsequently, BEEL invoked arbitration. An arbitral award dated 23.03.1999 was passed which inter alia substantially allowed BEEL’s claims including claim for ‘Compensation for loss of Overhead and profit and also profitability. HPCL preferred an arbitration petition challenging the Award before the High Court of Judicature at Bombay, which was dismissed by the Ld. Single Judge. Thereafter, HPCL filed an appeal and in departure from the findings of Ld. Single Judge, the Arbitral Award was set aside by the Division Bench of the Hon’ble High Court exercising power under Section 37 read with Section 34 of the Arbitration and Conciliation Act. The SC judgement in ‘Batliboi Environmental Engineers Limited v. Hindustan Petroleum Corporation Limited and Another’ upholds the decision in of the Division Bench and dismisses the civil appeal filed by BEEL.
Findings & Analysis:
The Hon’ble Supreme Court has extensively analysed the findings in the Award and inter alia discussed the principles and formulae for computing a claim for increased overheads and loss of profit in a works contract. The Supreme Court has emphasized on the need for giving reasoning and justification for the amount of damages awarded by the Arbitral Tribunal and upheld setting aside of the Award for the lack thereof.
The SC has observed that the Award is deficient as it is particularly silent as to the method and manner in which the arbitrator had computed damages and there is lack of justification as regards the method adopted by the arbitral tribunal. BEEL had based for loss on account of overheads and profits/profitability upon 48 months delay as on 27.08.1997. BEEL for computation had considered 10% of the contract value towards overheads and other 10% towards profits/profitability for arriving at the figure of Rs. 3,38,38,460/-, after taking into “account the same percentages from the payments already received by them”.
The Supreme Court has noted that the loss towards overheads and profits/profitability is to be computed on the payments due for the un-executed work, and should exclude the payments received/receivable for the work that has already been executed. In other words, damages towards expenditure on overheads and loss of profit are proportionate, and not payable for the work done and paid/payable. Delay in payment on execution of the work has to be compensated separately.
The Hon’ble Apex Court has further opined that the computation of damages should not be whimsical and absurd resulting in a windfall and bounty for one party at the expense of the other. The computation of damages should not be disingenuous. The damages should commensurate with the loss sustained.
The Hon’ble Apex Court has held that even to ascertain the loss of overheads and profits if formulae such as the Hudson’s, Emden’s, or Eichleay’s formulae are applied, the factual assumptions should be examined while applying a particular equation or method. In its verdict, the Supreme Court has cautioned that these formulae when applied should be with full care and caution not to over-award the damages.
The Hon’ble Apex Court has therefore laid down a more stringent criteria for determination of the quantum of damages by the arbitral tribunal for such claims of loss of profit. Hon’ble Supreme Court has analysed the Hudson’s formula which is widely used for computation of such claims and observed that Hudson’s formula, is couched on three assumptions. First, that the contractor is not habitually or otherwise underestimating the cost when pricing; secondly the profit element was realistic at that time; and thirdly, there was no fluctuation in the market conditions and the work of the same general level of profitability would be available to her/him at the end of the contract period.
The Court also noted that the Eichleay’s Formula is more precise and accurate in calculating loss of profits since it requires the contractor to itemise and quantify the total fixed overheads during the contract period. It takes into consideration all the contracts during the delay period to determine the proportionate fraction of the total fixed overheads.
Conclusion:
Therefore, for a party claiming damages for loss of profit, satisfaction of these assumptions is necessary. In view of the findings in the Batliboi Judgment, now, Material should be furnished by the party claiming such damages, such as producing invitations to tender which were declined due to insufficient capacity to undertake other work, or from the books of account of the contractor which show a decreased turnover etc., in order to justify and assure that the assumptions for applying the formulae are met.
This observation of the Hon’ble Supreme Court is commensurate with the principle of Section 73 of the Indian Contract Act, 1872, that a party may be awarded damages only for those losses that it has been able to prove that it has suffered.
The Hon’ble Supreme Court’s extensive analysis of the computation methods for a Loss of Profit claim and setting out the materials requisite for establishing said claim has heralded a shift in the jurisprudence on the ‘Loss of Profit’ claim, and will act as a caution for Arbitral Tribunals before which the claim is raised in First Instance – insofar as calculation, factual assumptions and material furnished to establish Loss of Profit, is concerned. Therefore, it can be said that the Hon’ble Supreme Court has further clarified and fortified the standards for proving the assumptions in a Loss of Profit claim.
[1] Batliboi Environmental Engineers Limited
[2] Hindustan Petroleum Corporation Limited
